Following the Example: Eight Rounds of Money Printing Later, Japan Falls into Recession for the Fifth Time


Japan Falls into Recession for the Fifth TimeLast Wednesday, as I was listening to Ben Bernanke during a press conference about the Fed’s recent money printing actions and future plans to spur the U.S. economy, I was wondering why we aren’t looking more at the Japanese economy and what happened in its lost decades. (It used to be called “lost decade.” It’s now been 20 years—hence, officially, it’s “lost decades” now.)

You see, what the Federal Reserve is doing to keep the U.S. economy going—aggressive growth of its balance sheet as a result of multiple rounds of quantitative easing—the Japanese have also done. The Bank of Japan flooded the Japanese economy with money—it has done eight rounds of quantitative easing and has been keeping interest rates artificially low for many years. With all of this, after 20 years, the Japanese economy still hasn’t found growth. (Source: Telegraph, September 2012.)

Quantitative easing hasn’t worked for Japan. According to revised numbers issued by the government, the Japanese economy contracted at the rate of 0.1% annually in the second quarter of 2012. (Source: Financial Times, December 10, 2012.) The Japanese economy is now back in recession, as it has again achieved negative growth in gross domestic product (GDP) for two consecutive quarters. In the third quarter of 2012, the Japanese economy contracted by 0.9%. (Source: International Business Times, December 9, 2012.)

This is the fifth time the Japanese economy is entering a recession in the last 20 years!

Not only is the Japanese economy going into another economic slowdown after a rigorous amount of money printing, but also the Japanese yen has fallen in value against other major currencies. Just this year alone, the Japanese yen has declined more than eight percent against a basket of the currencies of other industrialized counties. The following is a chart of the Japanese Yen Index, which tracks the performance of the yen compared to major currencies.

$XJY Japanese Yen-Philodelphia stock market chart

Chart courtesy of

Coming back to the Federal Reserve and more quantitative easing, I have to ask: does quantitative easing work? By looking at the Japanese economy, I believe it has caused more trouble than good. If quantitative easing were the answer to economic growth, then the Japanese economy shouldn’t be in a recession for the fifth time in 20 years.

In economics, there is a concept called “marginal benefits.” At the very core, the concept means that if there is more of something, the benefits eventually decrease. The quantitative easing by the Federal Reserve may have been beneficial in the first round, but as more dollars are printed in an effort to boost economic growth, the benefits decline.

Dear reader, the Japanese economy hasn’t been able to recover after many attempts by the central bank to boost the economic growth via money printing. And the more time passes, the more I see the U.S. economy following Japan’s path of meager to no growth for 20 years.

Michael’s Personal Notes:

As debt-infested European countries are struggling with implementing austerity measures, American taxpayers should buckle up for a taste. The U.S. economy is on its way to austerity measures, but not by choice.

According to a study done by investment research firm Morningstar, Inc., 21 states in the U.S. economy have pension systems that are in poor financial condition or that are not fiscally sound. Among the states, Illinois, Kentucky, and Connecticut are the lowest-funded states—at 43.4%, 50.5%, and 53.4%, respectively. (Source: Morningstar, November 26, 2012.) As per Morningstar’s standards, a pension system must have a funded ratio of 70.0% or more in the U.S. economy to be considered financially sound, meaning it should have at least $0.70 for every dollar of liabilities.

Other states, such as Arizona, are struggling to get their pension system in order, as well. In 2010, the state was short the $12.0 billion it needed to pay for its obligation. Fast-forwarding to 2011, the gap had grown and Arizona’s pension system needed $13.0 billion to cover its $48.0 billion pension obligation. (Source: Arizona Capitol Times, December 7, 2012.)

Kentucky’s pension system is following in the same footsteps. It needs $33.0 billion to overcome its unfunded liabilities. (Source: Courier Journal, December 11, 2012.)

My question: where will the states get the money to fund their pension systems? If you guessed the federal government, then you may be right. As the pension system deteriorates in the U.S. economy, I believe states will have no choice but to look at the federal government to bail them out.

Hence, you can see why I wouldn’t be surprised to see austerity measures pour into the U.S. economy in one form or another. They could just come from lower pension payments and higher taxes, or from an extension of the official retirement age. Just to give you some perspective; each resident in Alaska is on the hook for $10,235 for unfunded liabilities in its pension system.

The U.S. economy is at a critical point. In time, our problem here in the U.S. economy could become very similar to the ones faced by the debt-infested eurozone countries—governments spent too much or promised too much in the past, and now they pay the price. The U.S. economy looks to be heading in the same direction. If the creditors giving loans to the eurozone countries are asking to implement austerity measures, those who bought U.S. government debt will do the same…unless the Federal Reserve eventually owns all debt.

The U.S. economy is structurally damaged. It could take decades and rigorous austerity measures to get out of this mess, as change won’t occur in the blink of an eye.

Where the Market Stands; Where It’s Headed:

What’s happening to the stock of Apple Inc. (NASDAQ/AAPL)? It looks like it’s falling off a cliff…almost like panic selling. My bet is that many funds got nervous, hit the panic button, and are getting out of the stock. But Apple is not the big story; 2013 is the big story. I expect to see many big-name stocks suffer in 2013 as the multi-year bear market rally comes to an end.

What He Said:

“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in Profit Confidential, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.


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